INTERACTIVE: US Gulf petchem boom made Harvey the first global hurricane

27 August 2018 15:00 Source:ICIS News

HOUSTON (ICIS)--Powerful hurricanes have hit the US Gulf Coast in the past, but Hurricane Harvey was the first to strike after petrochemical producers began a wave of expansion projects in the region, making the storm the first to have significant effects on global petrochemical markets.

The petrochemical industry did a remarkable job of restarting production plants after Harvey, especially when compared with Hurricane Ike, the last big storm that hit Houston in 2008.

However, despite all of their preparation, companies still shut down plants and declared force majeure as a result of Harvey. Tightened supplies led to persistently higher prices for petrochemicals.

Hurricanes are still going to strike the Gulf Coast, and companies are still not finished expanding capacity in the region. The next major storm could be even more disruptive.

This vulnerability extends beyond petrochemicals. The US is now a large exporter of petrochemical feedstocks such as crude oil, ethane and liquefied petroleum gas (LPG). The country was exporting none of these products in significant amounts during Ike or Hurricane Katrina, another big storm that hit Louisiana in the late summer of 2005.

On the one-year anniversary of Harvey, it is clear that companies around the world will be vulnerable to what happens on the Gulf of Mexico.

Hurricane Harvey made landfall late on 25 August 2017 near Corpus Christi, Texas, according to the US National Weather Service.

By then, several ports, refineries and petrochemical plants had shut down in preparation for the storm.

Harvey then stalled in southeast Texas, producing enormous amounts of rain, the weather service said. Cedar Bayou in Houston received a total of 51.88 inches (131.8cm) of rain, setting a record in North America.

Some plants suffered flood damage.

At Arkema's plant in Crosby, Texas, trailers storing organic peroxides caught fire after the complex lost power.

Other plants were down briefly, but had to contend with logistical disruptions. In mid-October, Celanese's plant in Bay City, Texas, was relying on trucks and rail for deliveries because debris on the Colorado river prevented barges from accessing the site.

In the immediate aftermath of the storm, even those modes of transportation were out.

The map below shows the plants that suffered from disruptions as a result of Harvey (click on first tab labelled "Impacted by Harvey").

The disruptions extended well beyond the state of Texas. Right before Harvey, Mexichem and Occidental Chemical (OxyChem) had started up a cracker near Corpus Christi. That cracker provided Occidental with the ethylene needed to produce vinyl chloride monomer (VCM).

OxyChem then shipped that VCM to Mexichem's vinyl plants throughout the hemisphere.

The two companies shut down the cracker in anticipation of the storm. Mexichem would later declare force majeure on vinyl products made at its plants in Mexico, Colombia and the US. Those plants relied on the VCM shipments made possible by the cracker.

The storm had a significant effect on global prices for petrochemicals, according to the ICIS Petrochemical Index (IPEX). The index tracks the movement of 12 major petrochemicals and polymers.

The charts below show the month-to-month changes in the Global and US IPEX for August and September since 2011.

The Global IPEX has remained elevated since a second run-up during the winter of 2018, as shown below.

That winter-time increase was caused by unusually cold weather on the Gulf Coast, which again illustrates how weather in that region can affect prices around the world.

Although Harvey certainly affected petrochemical markets, when compared with previous hurricanes of similar magnitude such as Alice, the price escalation was lower, according to ICIS senior consultant James Ray.

This was due to the particular nature of Harvey and the widespread flooding that it caused, Ray said. These floods disrupted demand and logistics as well as supplies.

Prices rose by about 14%, driven primarily by higher crude oil. The hurricane's effect contributed up to 5.5% of this, as measured by tracking the US IPEX, he added.

This effect from the hurricane continued until March 2018. In other words, it took five months before prices returned to normal relative to crude oil.

The chart below compares the actual US IPEX to the typical IPEX as normally related to Brent.

Another factor that reportedly mitigated the price escalation was that producers were better prepared for Harvey than for past hurricanes, so that the damage was less, Ray said.

Still, refinery utilisation rates did not return to pre-Harvey levels until June 2018, demonstrating the long-term effects of such a storm, he said.

The table below compares refinery utilisation rates associated with Harvey and Rita, another powerful hurricane that shut down a similar number of refineries.

The Gulf Coast is no stranger to bad weather, but during the previous storms, the region was a very different place. Hurricanes Ike, Rita and Katrina made landfall before the advent of shale gas, which transformed the US' petrochemical industry, leading to a wave of new projects.

Before shale gas, the US chemical industry was in retreat.

Suddenly, the US had a growing supply of low-cost natural gas liquids (NGLs), the predominant feedstocks for the nation's crackers.

The technological advances that made shale gas possible were later applied to crude production, which led to a surge in oil production.

The result was an export boom in every category of hydrocarbons in the US, as shown in the table below. The statistics are listed in thousands of barrels per day. Liquefied natural gas (LNG) is listed in millions of cubic feet.

2007 2017
Crude 27 1,118
Oil Products 1,247 3,329
Propane 42 905
Ethane NA 181
LNG 48,485 707,542

Source: Energy Information Administration (EIA)

The table below compares petrochemical exports during the same period.

2007 2017 Units %
HDPE 1,532,052,698 2,027,256,197 kg 32.3
LLDPE 672,017,925 646,881,879 kg -3.7
LDPE 812,269,071 789,880,731 kg -2.8
PVC 1,016,668,991 2,729,529,131 kg 168.5
Methanol 252,538,899 1,489,789,767 litres 489.9
Styrene 1,905,308,633 1,913,519,512 kg 0.4
Total (kg) 5,938,317,318 8,107,067,450 kg 36.5

Source: US International Trade Commission (ITC)

Although exports for low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) declined, that was more than offset by the increases in high density polyethylene (HDPE), polyvinyl chloride (PVC) and styrene.

That caused total exports by mass to rise by 36.5%. Methanol was excluded from the total because it was measured in litres, not in kilograms.

In one decade, the US became the world's largest exporter of ethane and liquefied petroleum gas (LPG) as well as a major source of crude oil and LNG.

For petrochemicals, companies such as LyondellBasell were quick to expand existing units, which allowed them to rapidly increase capacity to take advantage of the surge of cheap feedstock before the new plants could come online.

Other markets like PVC realised that the feedstock advantage in the US has given them a huge cost advantage in foreign markets. Exports exploded even though these companies added little new capacity for these products.

THE NEXT STORM
Hurricanes are not going away and companies are not done building new plants in the US.

Already, companies have started up several plants since Harvey, with some units beginning operations just weeks after the storm.

The table below lists the start-up announcements made so far for the Gulf Coast region. Figures are in tonnes.

Company Capacity Product Location Start-up
Chevron Phillips Chemical 500,000 bimodal HDPE Old Ocean, Texas Sep-17
Chevron Phillips Chemical 500,000 mLLDPE Old Ocean, Texas Sep-17
Dow Chemical 1.5m Ethylene Freeport, Texas Sep-17
Dow Chemical 400,000 PE Freeport, Texas Sep-17
ExxonMobil Chemical 650,000 PE Mont Belvieu, Texas Oct-17
INEOS/Sasol 470,000 HDPE La Porte, Texas Q4 17
Enterprise 750,000 propylene Mont Belvieu, Texas Q1 2018
Dow Chemical 350,000 LDPE Plaquemine, Louisiana Q1 2018
Dow Chemical 200,000 EPDM Plaquemine, Louisiana Q1 2018
Chevron Phillips Chemical 1.5m tonnes ethylene Baytown, Texas Mar-18
Oxiteno 170,000 surfactants Pasadena Q2 2018
OCI 1.8m methanol Beaumont, Texas Jun-18
ExxonMobil Chemical 1.5m tonnes ethylene Baytown, Texas Jul-18

Companies are on track to start up more plants later this year on the Gulf Coast. Looking ahead, companies have announced plans to start up more than 30 individual units in the next 10 years.

Many of these plants are premised on exports, meaning that global markets will become even more vulnerable once these plants start up and when the next storm strikes.

The following map shows the plants that have started up in the months after Harvey and projects that are expected to being operations in the years ahead.

* * *

For Harvey, petrochemical companies did a tremendous job in responding to the storm by creating communication hubs to keep customers, employees, government and the public informed about their operations.

Companies helped employees recover from the storm so they could get back on their feet and return to work.

Still, plant outages and force majeure declarations will happen during future storms regardless of how well companies prepare.

That's because many of the causes of shutdowns are beyond the control of companies.

For ports, storms can make it too dangerous to allow ships to enter and leave. Bays as well as rivers leading to plants can become silted and filled with debris. Rail lines shut down. Roads become inundated.

Petrochemical companies cannot improve drainage, heighten roads or bolster rail lines. They can prepare for Mother Nature, but they cannot control it.

That preparation, once restricted to the US, will now spread around the world.

Pictured: Flooded homes in Beaumont, Texas
Source: Juan De Leon/ZUMA Wire/REX/Shutterstock

By Al Greenwood

By Al Greenwood